Litigation Finance Waterfalls
Insight John J. Hanley · December 29, 2020
"Look with open eyes and you will see the beauty of the waterfall." - Anthony T. Hincks
A key term in pricing for litigation finance (sometimes called litigation funding) is the order of priority in which litigation proceeds are paid to parties with an interest in the matter including the litigation funder. This is known as the waterfall.
In our experience, it has always been the case that the financier’s money is the first money out. Distributions will first be made to the financier to return an amount equal to the contributions advanced pursuant to the litigation funding agreement with a minimum acceptable return. If the claimant or lawyers prosecuting the case are also advancing funds alongside the financier the distributions may be made pro rata until all parties who have made advances are fully reimbursed. It is very common for counsel in the matter to accept a contingency fee or hybrid of hourly and contingency fee arrangement and they are usually paid next. The claim holder typically takes the remainder. In addition, waterfalls sometimes provide that a financier will receive a decreasing marginal rate of money. For example, a financier might receive 100% of the first $2M in any settlement or verdict but 75% of the next $1M, 50% of the $1M after that, and 25% of anything in excess of $4M.
Litigation finance is a fast growing and very attractive asset class for investors. Litigation finance can level the playing field by providing enterprises of all sizes with the capital needed to redress wrongs. Our litigation finance practice covers all areas, including commercial torts, breaches of contract, mass torts, patent infringement, antitrust, and appraisal rights. We negotiate, structure, and draft litigation financing solutions for claimants and financiers for litigation on a non-recourse basis from inception through appeal and enforcement.
John J. Hanley focuses his practice on litigation finance, first and second lien financings; private placements of debt and equity securities; and the purchase and sale of loans, securities, trade claims, and other illiquid assets. His clients include litigation funders, claimants, business development companies, specialty lenders, investment banks, hedge funds, actively managed CLOs, special purpose vehicles, and other financial institutions. Read more.
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